Dogs of the Dow?

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K1
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Post by K1 » Mon Sep 27, 2004 9:21 am

Shakyamuni,

just been reading about the "Dogs of the Dow " investment strategy here.

Does anybody uses this and can one improve on the professed results of 17.7% return since 1973 when you combine this with better money management rules and risk control?

stancramer
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Post by stancramer » Mon Sep 27, 2004 11:33 am

In my opinion there are several things wrong with that website (and O'Shaunessy's book DotD)
  1. They quote an arithmetic average of the yearly returns, when in fact what matters is the Compounded annual growth rate
  2. They don't present any "pain" data (such as maximum drawdown %, duration of longest drawdown, standard deviation of returns) nor do they present any "gain versus pain" measurements such as MAR ratio, Sharpe Ratio, return retracement ratio, etc.
  3. They don't present an equity curve
  4. They don't even attempt to account for slippage and commissions. They just set S+C equal to zero.
If you're wondering about item 1. consider this example. Your "Turtles of the S&P" investment returns for the past four years are: +25%, +25%, +25%, -7%. These DotD website jokers average the numbers and say the "Average annual return" is 17%. (17 = 25+25+25-7). However, your Compounded annual growth rate is, in fact, 16.09% per year. (1.25*1.25*1.25*0.93 = 1.1609^4). Isn't it shocking that they happened to choose an incorrect calculation method that (whoops!) gives bigger number? What a surprise.

Whaddya wanna bet that if you saw the equity curve and/or the MAR Ratio of the Dogs of the Dow, it'd give you a very upset tummy? Maybe that might be part of the reason it isn't on the website? Ya spoze?

shakyamuni
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Post by shakyamuni » Mon Sep 27, 2004 4:15 pm

The Dogs of the Dow strategy doesn't appear to be closely related to market asymmetry and trading the short side of the equity markets. (Unless you are simply advancing the suggestion "don't go short!")

Whether or not value strategies such as Dogs of the Dow or other methods have any efficacy as components of equity trading systems seems like it may be a topic for another thread, unless of course someone wants to state a claim relating value-based methodologies to asymmetry or short positions.

BigBrad
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Post by BigBrad » Mon Sep 27, 2004 10:57 pm

I believe that somebody has tested the "method" using a different entry time, i.e. select your trades yearly in July instead of January and found that the strategy just didn't hold up.....

K1
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Post by K1 » Tue Sep 28, 2004 8:31 am

Thank you Stan and Brad for the replies.

traderDJ
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Post by traderDJ » Tue Sep 28, 2004 9:23 am

BigBrad wrote:I believe that somebody has tested the "method" using a different entry time, i.e. select your trades yearly in July instead of January and found that the strategy just didn't hold up.....
I recall The Motley Fool making a big fuss about similar yield and price based Dow strategies back in the late 90's. When someone finally subjected the strategies to more rigorous testing, it all fell apart due to the original assumptions around entry timing. More details are at http://www.fool.com/ddow/FoolishFourInfo.htm?ref=LN

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